by Calculated Risk on 5/05/2006 01:51:00 PM

Catherine Reagor writes in The Arizona Republic: Risky ARM mortgages come due

Thousands of people used the non-traditional mortgages last year to afford a house in the Valley, where home prices increased nearly 50 percent from 2004. They're paying for that decision today.
...
Arizona incomes aren't climbing at the same rate, meaning many of those already struggling to pay their mortgages could wind up losing their homes in the months ahead.

Arizona's housing market could be hurt more than other areas of the country by a fallout from rapidly rising rates on ARMs.

Economists say nearly 40 percent of all home loans in metropolitan Phoenix are adjustable. Nationally, about 30 percent of all mortgages are ARMs.
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"Record numbers of people lured by low initial teaser rates have taken out adjustable-rate mortgages that are putting them in vulnerable positions as rates rise," said Jay Luber, a vice president with First Horizon Home Loans in Phoenix.

Lured? No, homeowners were just taking then Fed Chairman Alan Greenspan's advice:

"... many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.
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American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
Alan Greenspan, Feb 23, 2004

In the Arizona Republic article, Ms. Reagor notes:

The number of people making late payments on ARMs in Arizona climbed during the second half of 2005.

At the end of the year, almost 10,000 homeowners across the state were behind on their payments for adjustable mortgages. That is almost double the rate from last summer, according to the Mortgage Bankers Association of America.
...
Last year, strapped homeowners were able to sell quickly for hefty profits or refinance into ARMs with artificially low teaser rates. As a result, foreclosures were at nearly record lows.

But now, a growing number of people are so stretched they are spending more than they earn.

First American Real Estate estimates that $297 billion worth of adjustable-rate mortgages issued nationally in 2005 and 2004 could end up in foreclosure.
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"If interest rates continue to go up and housing prices don't, more people will be squeezed," said Elliott Pollack, an Arizona economist and real estate investor.

"When the next recession rolls around, many people are going to be set up for a very bad situation."